While the industry applauds HM Revenue and Customs’ (HMRC) continued commitment to brownfield land through a 150% tax relief on qualifying costs from a company’s corporation tax bill, we must also factor in the impact that increased duty in the form of landfill tax will have on the overall viability of development – is this another ‘stealth tax’?
It is not just a case of LRR being enhanced as a result of the changes. Indeed the actual scope for making a claim will be lessened, and the newly introduced derelict land tax relief is so restrictive in its qualification criteria that it will only apply in a minority of cases.
Taking the derelict land relief first, HMRC has acknowledged that costs associated with the demolition of historic structures and grubbing up of redundant services and plant bases, not just contamination, present a major barrier to the redevelopment of brownfield sites. As such, they have indicated that such costs will be eligible for tax relief; a full list of qualifying activities has already been published and will be enacted through secondary legislation.
The catch though is that the site must have been ‘derelict’ since 1 April 1998, which the claimant must be able to demonstrate either though a listing on the National Land Use Database (NLUD) or by other means. Where the land is not recorded on the NLUD, it will put the onus on the taxpayer to demonstrate that dereliction using HMRC guidelines. As a result of the restrictive qualification criteria, only a handful of sites are likely to be eligible and therefore it is unlikely that the new tax relief will be sufficient to divert strategy away from the easier to develop greenfield sites.
Landfill tax exemption
We cannot discuss the modified LRR regime without looking at the withdrawal of the landfill tax exemption on 30 November 2008. The previous exemption from paying landfill tax on contaminated material disposed of to tip as part of a remediation programme did not incentivise sustainable remediation techniques.
However there were, and still are, many instances where it is simply not possible to treat contaminants and the only option is to landfill. Where this is the case, the new legislation prevents the landfill tax element of any disposal from forming part of a claim for tax relief. This has two main implications.
Firstly the development viability of smaller inner city sites are likely to suffer as a result of the additional financial burden. Secondly, any contractor’s tenders and valuations for works that involve disposal to tip must separately identify the landfill tax elements; a further layer of disclosure from contractors and more administration on the parts of both the taxpayer and contractor.
There are a number of notable changes to the existing land remediation relief legislation. These include a number of anti-avoidance restrictions and a new condition whereby the tax payer must acquire a ‘major interest’ in the land to be eligible to make a claim for tax relief among others. This is defined as a freehold or long leasehold with seven years unexpired. With an increase in the number of joint venture projects and structures to minimise land-banking, this could potentially restrict the ability for a developer to claim tax relief. This would be particularly so in the case of the HCA’s ‘Brown for Green’ initiative as the developer would never take ownership of the land that they remediate.
An added complication occurs where the polluter retains the head interest – for example with land acquired under a long leasehold from the polluting body – as the developer is prevented from claiming LRR due to the polluter still retaining an interest in the remediated land.
HMRC has recognised that developers frequently enter into agreement with the polluter of a number of sites, whereby the price paid for the land can be ‘topped up’ as a result of increased profits to the developer. Perhaps a bit misguided, they appear to be proceeding on the basis that these payments are generated from the developer’s tax relief and not as a result of commercial considerations, and prevent the developer from claiming tax relief on qualifying works. We look forward to further clarification on these issues in HMRC’s response to the consultation.
Natural substances, with specific mention of water and air, have been excluded from qualifying for tax relief. Practically, this means that it will no longer be possible to claim on flood mitigation works or mineshaft treatment works. Excluded from this clause are arsenic, radon and Japanese knotweed, which will be allowed. Through the recent consultation, HMRC has sought to restrict the extent to which consequential costs should qualify for tax relief, to the extent that only the direct remediation works would be eligible, representing a significant shift in policy.
It is not all doom and gloom, however. After many years of wrangling, HMRC has finally conceded that costs associated with Japanese knotweed should qualify for LRR, and this is to be applied retrospectively to cover expenditure since 11 May 2001 and presents a window of opportunity for companies to generate tax repayments from earlier years, assuming all other entitlement conditions are met.
Going forward, however, HMRC has recognised that there are now many sustainable options for dealing with knotweed other than the once favoured dig and dump method. As a result, for expenditure incurred from April 2009 onwards, only on-site treatment costs will qualify for tax relief; any off-site disposal costs will be disallowed.
We should not lose sight of the fact that there is still a continued commitment to the development of brownfield sites and incentivising developers for taking on these challenges.
Yes, some changes were required to move the sustainable agenda forward and in the whole we are still left with a valuable source of tax relief (or tax credit) in these troubled economic times. Early indications suggest that the amendments will result in a drop of 15-20% in claimable cost. Only if your site qualifies for the extended derelict land relief are you likely to be better off, but the structure of land and joint venture deals will need much more care and planning to ensure that the ability to claim tax relief is not compromised.
Once the guidance notes have been signed off, we will at least have a greater certainty over the application of the relief. However, whether it is embraced by developers as intended or finds its way into some of the HCA sponsored initiatives, only time will tell.